As Bitcoin miners continue to capitulate due to high costs and decreased block rewards, Andy Fajar Handika, CEO and co-founder of Loka Mining — a decentralized mining pool operator — says he’s found a way to sell future hashrate to finance short-term needs and growth.
In an interview with Cointelegraph, the Loka Mining CEO introduced the idea of forward hashrate contracts — allowing miners to sell their future hashrate for fiat-denominated loans from creditors — which could help to keep the capital-intensive business viable.
These proposed hashrate forward contracts allow smaller mining operations to finance growth and pay for operations today while using the Bitcoin hashrate of tomorrow, he explained.
Handika explained the benefit of these tokenized contracts, now offered by Loka Mining in 3-month, 6-month, and 1-year terms:
"It means that you can use your debt money to buy more mining machines and hedge your price volatility risk because the risk of Bitcoin's price in fiat is now passed over to the investors, who buy the mining contract."
Handika also said that creditors reap benefits from the tokenized arrangement because the hashrate forward contract can be re-used by the creditors as collateral for other loans — similar to asset restaking.
The method offers an alternative to the traditional way of fundraising by large mining companies, such as using initial public offerings or issuing corporate debt to grow their mining operations.
Smaller mining companies or individual miners don’t have this luxury and often can only finance growth by selling their Bitcoin (BTC) holdings or using their Bitcoin as collateral for loans on decentralized finance (DeFi) protocols.
Related: Bitcoin miner Rhodium files for bankruptcy in Texas court
Handika says these DeFi strategies carry a substantial amount of risk due to sudden downturns in the price of Bitcoin, citing the “black swan” event that took Bitcoin’s price down from around $59,000 to lows of approximately $49,500 on Aug. 5, 2024.
Bitcoin mining industry experiencing economic hardship
A recent cloud mining firm BitFuFu report revealed that mining expenses surged by 168% over the past 12 months. These increased costs, combined with the decreased block subsidy, have placed a considerable economic strain on Bitcoin mining companies.
Mining companies’ debt-to-equity ratios. Source: The Miner Mag.
This new post-halving reality has stressed many mining companies to the brink as Bitcoin miners look to diversify their operations to artificial intelligence and high-performance computing to make up for the shortfall in profits.
A recent JPMorgan report also shed light on the current plight of the mining industry. The report found that mining companies flush with cash, such as CleanSpark and Riot Platforms, acquired companies that could no longer compete as the industry continues to consolidate.
Magazine: Bitcoin miners steamrolled after electricity thefts, exchange ‘closure’ scam: Asia Express